Tuesday, June 15, 2010

Mobile operators should learn from utility companies

Emeka Obiodu, senior analyst, Ovum.

AUSTRALIA: If you are a mobile operator facing the prospect of slow growth or no growth, the experience of utility companies should interest you. Just like electricity and gas products have been commoditized, mobile operators are now concerned that the wind of commoditization for voice and data products is blowing unstoppably.

In our report, “What mobile operators can learn from utilities”, we urge mobile operators to learn from the experience of utilities in adapting to a slow-growing, but stable, cash-rich market.

Commoditization was always going to happenAlthough it has not yet reached panic levels, the commoditization of voice and data services has altered the mobile telecoms landscape. On the surface, the industry is still stable, running well, generating strong cash flow, relevant in today’s society, and is an engine for economic growth.

However, revenue growth is slow or (sometimes) worryingly absent. In Europe, there are few prospects for new revenues. Yesterday’s hope – the emerging markets – is rapidly nearing market maturity, and a “killer application” remains illusive.

The fixed telecoms sector went through the same trend five years ago. Then, multi-user DSL services wiped out any hopes for the walled garden strategies promoted by the likes of AOL. Today, a similar fate has hit the mobile sector. Smartphones, flat-rate voice and data tariffs, the decoupling of applications from connectivity, and a consumer base that has got used to the freedom of the open Internet mean that mobile operators are limited in what they can do to find new revenue sources.

It is time for the industry to review its operational model and pricingMobile operators have always hoped that they wouldn't be reduced to bit carriers. While that idealism was warranted five years ago, today’s reality calls for them to accept that there isn’t much they can do beyond carrying voice and data traffic. In our Telecoms in 2020 report series, Ovum highlighted that there is a profitable business for operators who position themselves as LEAN (low-cost enablers of agnostic networks) – carrying bits in their networks as efficiently as possible.

Utilities are comfortable and profitable with the LEAN model. As such, they devote their efforts and new technology (e.g smart metering) towards making the process of supplying electricity/gas efficient.

Ultimately, the key concern is about money and how to remain profitable. Utilities maintain a tight grip on their pricing by retaining a rental element to their pricing and charging more for incremental usage. Mobile operators have largely abandoned separate rental revenues but it is good to see them starting to impose controls on data usage.

Operators and regulators need to reconsider the importance of infrastructure competitionAs in the case of utilities, there is no longer such a strong justification for infrastructure competition in many mobile markets. Market penetration has crept above 100%. Competition at the retail level is healthy enough for regulators. Not surprisingly, operators and regulators are encouraging the growth of network sharing.

If operators are sharing networks, isn’t it time to also question the expectation for each operator to build its own network? And, in the post-LTE era, how are these networks paid for?

Utilities do not always rely exclusively on the private sector to fund new networks. Governments step in occasionally, either via general taxation, specific duties, or by endorsing inflation-busting price rises.

The telecoms industry has begun to tap into these sources too, as can be seen in the use of the universal service obligation fund (such as in India) or the emerging debate on how to fund new high-speed broadband networks in Australia, Europe, and the US.